3-Salaries

3)- Salaries

For service industries, salaries are often the largest single expense. In other sectors, salaries disappear in cost of goods sold or general overhead, and are more difficult to isolate and study.

When salary expense is given or obtainable, an average salary can be calculated by dividing salary expense into number of employees. That average salary can be compared to industry averages. While it is desirable to maintain productive efficiency and high net profits by keeping salaries in line, management theory tells us that employee moral can be undermined by low wages. Low salaries may translate in declining product quality, poor customer service and diminishing sales efforts. Employee moral is usually best evaluated with information on employee turnover (i.e. proportion of employees that need to be replaced each year) but obtaining this number requires some investigation. Companies in service industries can be especially sensitive to personnel strategies, witness the success of some airlines pinning their sales on the smile of their stewardesses for so many years.

To study salaries, we take the air carriers industry with a sample of five airlines. Delta, AMR (American Air Lines) and UAL (United) are worldwide known. US Airways is primarily a US domestic airline. Midway Airlines is a small regional US airline operating out of Raleigh, NC. Useful data for the comparison is presented in Table T-13.7 below.

Table T-13.7

Comparison of Employee expense of five US air carriers in 1999

. Delta AMR UAL US Air Midway

Revenues (in $ millions) 13,417 19,205 15,784 7,826 205

Salaries (in $ millions) 4,993 6,507 5,670 3,101 32

% Salary expense 37 34 36 40 16

Number of employees (1,000) 74 116.2 n/a 38.2 1

Average salary ($) 67,473 55,998 - 81,178 32,000

Post-retirement benefits (in millions) 1,894 1,649 1,489 2,384 0

Benefits per employee ($) 25,595 14,191 - 62,408 0

Available seat miles ASM (millions) 144,003 159,768 176,686 56,723 1,544

Salaries per ASM (in cents) 3.47 4.07 3.21 5.47 2.07

PBT (in $ millions) 1,090 2,164 1,942 902 24

NW (in $ millions) 4,448 6,698 5,151 593 70

TA (in $ millions) 16,544 22,303 20,963 7,870 203

% RONW 24.5 32.3 37.7 152.1 34.3

% ROA 6.6 9.7 9.3 11.5 11.8

Source: Annual Reports

The table suggests at first sight that Midway and US Airways are outperforming the other airlines on the basis of RONW (152% and 34%) and ROA (11.8% and 11.5%). But on closer analysis, Table T-13.7 reveals that the proportion of salary expense is similar for Delta, UAL and AMR (37%, 36% and 34%, respectively), while it is slightly higher for US Air (40%) and significantly lower for Midway (16%). When comparing salary cost per available seat mile, US Airways turns out higher (5.47 cents) and Midway much lower (2.07 cents) than the other three airlines (3.21 to 4.07 cents). When comparing average salaries, the same is apparent: US Air has a much higher average salary ($81,178) and Midway lower ($32,000), compared to Delta and AMR (with $67,473 and $55,998). And the same story is told when post-retirement benefits per employee are compared.

The conclusion that emerges is that Delta, AMR and UAL have adequate compensation packages for their employees, but the two others do not. Midway has no benefits and low salaries, which is likely to create employee dissatisfaction (however, Midway announced a profit sharing for the first time ever in 1998). At US Airways, a very different picture: employees have very high benefits and salaries, and this may strangle the company (as evident by the outrageous ROE of 152% due to a shrunk equity from several loss years). In its annual report, US Airways indicates that settling a contract dispute with its pilots is its first most important strategy. Nevertheless, in early 2000, US Airways was threatened by strikes again. In spite of US Airways reputation of excellence, the burden of employee demands can lead to exactly the same problems defunct airlines (such as Eastern Airlines) had.

The quality of the employed work force can also be evaluated by the amount spent on personnel training. Remuneration of key executives is revealing of what the company thinks of its own performance. In RMA Annual Statements Studies, this is one of the rare items of expense isolated and reported as a percentage of sales.

See review questions Q-13C3.1 through Q-13C3.3.

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